President Joe Biden signed the Inflation Reduction Act (IRA) into law on Aug. 16, approving a sweeping legislative package aimed at combating climate change, raising taxes on large corporations and lowering health care costs.
It’s big news for Medicare, which covers over 62 million Americans — mostly seniors 65 and older.
The new law will allow Medicare to directly negotiate prices for some of the program’s costliest drugs, cap insulin copays to $35, limit out-of-pocket beneficiary drug costs to $2,000 a year and ban drug companies from raising prices faster than inflation.
Health care experts consider it the biggest overhaul of Medicare in at least 20 years.
“Members of Congress, mostly Democrats, have been trying to give the authority to negotiate Medicare drug prices since the Clinton years, so this is really an enormous breakthrough,” said Tricia Neuman, a Medicare policy expert and senior vice president of the nonprofit Kaiser Family Foundation.
However, the new changes don’t roll out all at once, and there are some limitations in the law.
Here’s how the Medicare portions of the Inflation Reduction Act could impact your prescription drug costs.
At a Glance: Medicare Changes in the Inflation Reduction Act
There are five major Medicare-related provisions in the Inflation Reduction Act.
The new law:
- Creates a $2,000 cap on annual out-of-pocket Medicare drug costs for beneficiaries.
- Gives the government the power to negotiate Medicare drug prices with pharmaceutical companies.
- Limits premium growth in Part D to no more than 6% per year from 2024-2029. Part B premiums have increased 6% or more four times in the past decade, including last year, when Part B premiums jumped 14.5%.
- Penalizes drug companies for raising prices faster than inflation. If a drug’s price outpaces inflation, the company must pay the government the difference between the price charged and the inflation rate for all Medicare sales of that drug.
- Caps out-of-pocket insulin costs at $35 a month for all Medicare beneficiaries. Beneficiaries will be able to get this copay amount even if they haven’t met their deductible yet.
$2,000 Out-of-Pocket Spending Cap
Out-of-pocket drug costs are currently not capped under Medicare Part D, which covers prescriptions.
For patients on pricey medications without a generic or similar competitor, this can mean spending thousands and thousands of dollars a year on life-saving medications.
A new out-of-pocket limit guarantees that Medicare beneficiaries won’t pay more than $2,000 on prescription drugs in any calendar year starting in 2025.
It’s expected to provide major relief to Medicare beneficiaries.
“This change will allow people on Medicare to have peace of mind that they won’t pay more than $2,000 in any given year for their medications,” Neuman told The Penny Hoarder.
“That’s still a lot,” she added. “But for many, this will be a big savings.”
The AARP estimates that 1.2 million Medicare enrollees spent more than $2,000 on drugs in 2019.
Those beneficiaries would have saved an average of $900 each on drug costs if a $2,000 cap had been in place, according to an analysis by the Urban Institute.
Medicare Can Now Negotiate With Drug Companies
For decades, the federal government was prohibited from directly negotiating Medicare drug prices with pharmaceutical manufacturers.
The Inflation Reduction Act changes that.
The Health and Human Services (HHS) Secretary can now negotiate prices for expensive drugs covered under Medicare and punish drug companies that don’t comply.
Giving the government direct negotiating power is expected to save the program about $100 billion through 2031, according to estimates from the Congressional Budget Office.
However, the roll out is staggered and somewhat limited.
HHS is targeting drugs most costly to the federal government, and the HHS secretary can only negotiate prices on single-source drugs, that is, drugs without generics or competitors.
The first wave of 10 drug price changes won’t go into effect until 2026. Price changes for additional drugs will be phased in during following years.
No official, publicly available list of drugs earmarked for negotiations is available.
But drugs like Eliquis — a blood thinner estimated to cost the Medicare program $9.9 billion in 2020 — are likely to be top of the list.
Ultimately, how much beneficiaries may save from this provision depends on the drugs they take and the result of negotiations in coming years.
Inflation Rebates on Rising Drug Prices
Starting in 2023, drug manufacturers that raise the prices of their medications faster than the rate of inflation must pay a hefty fine to the government.
If a certain drug’s price spikes 14% from one year to the next year but consumer inflation only increases 9%, the drug maker must pay the difference in profits (5 percentage points) to the government as a penalty.
This inflation rebate provision is aimed at clamping down on drug manufacturers’ long-standing practice of hiking medication prices year after year — often at more than twice the rate of inflation, according to the AARP.
Expanded Eligibility for Extra Help Prescription Savings Program
Extra Help is a prescription drug assistance program for Medicare beneficiaries with low incomes. It helps pay drug plan premiums and annual deductibles while capping covered prescriptions to no more than $10 each.
Starting in 2024, the income threshold for the full Extra Help benefit will increase from 135% to 150% of the federal poverty level. That’s roughly $20,000 for a single person or $27,000 for a couple in 2022.
Currently, beneficiaries who fall in the 135% to 150% range receive partial Extra Help benefits. This provision will provide full benefits to an estimated 500,000 beneficiaries who fall into that income range, according to Kaiser Health News.
$35 Copay Limit for Insulin
Starting in 2023, all Medicare Part D plans must cap out-of-pocket costs for certain insulin products to $35. Beneficiaries will be able to get this copay amount even if they haven’t met their yearly deductible yet.
The Trump Administration announced a $35 insulin program as part of a Part D Senior Savings Model in May 2020. The program officially launched January 2021.
The Senior Savings Model is a voluntary program that incentivizes drug manufacturers and plan sponsors to opt-in and create enhanced Part D drug plans that feature a monthly copayment of no more than $35 for selected insulin products.
Plan sponsor participation grew from 2021 to 2022, according to the Centers for Medicare & Medicaid Services (CMS). The agency estimated that 800,000 enrollees who use insulin were enrolled in a participating plan in 2022.
Still, the Senior Savings Model had limitations. For example, some types of plans weren’t eligible to participate, including private fee-for-service plans.
“This new provision [in the Inflation Reduction Act] guarantees the $35 copay,” said Mary Johnson, a policy analyst with the nonprofit Senior Citizens League.
Johnson said the IRA provision is mandatory versus voluntary and thus ensures that all seniors who use insulin benefit from the new $35 copay cap.
Johnson said it is still not clear exactly how Medicare plans will implement the new requirement.
Beneficiaries charged more than $35 per month for their insulin in the first few months after the new Medicare copay cap goes into effect will be reimbursed, according to the American Diabetes Association.
Senate Democrats tried to pass a broader $35 insulin cap in the Inflation Reduction Act that would apply to all private insurance companies — not just Medicare — during the reconciliation process earlier this month.
However, this proposal fell through during last-minute negotiations.
Rachel Christian is a Certified Educator in Personal Finance and a senior writer for The Penny Hoarder.